The Best Insight About The Market Might be Closer Than You Think

The big news when it came to Amazon this morning was that the company bought Twitch for $1 billion. After reading countless analysts’ opinions of the purchase on CNN Money and Yahoo Finance and then turning on CNBC and getting several more earfuls, I felt I had a pretty clear picture of the analysts’s opposing views of Amazon’s acquisition. I read that Twitch was, “a service that lets users watch and broadcast video game play.” I also read all of the statistics, including 55 million monthly visitors and more web traffic than HBO GO. So I had done all the research that could be reasonably done about what exactly Twitch brings to the table from a nuts-and-bolts perspective.

I am not a gamer. My nerdiness has always been focused in a different direction. So this morning, I had the briefest of chats with one of my best friends about Twitch. I simply asked what his impression was of the site. He told me, “It’ll probably end up being like a nerdy youtube. ‘Professional’ gaming is a thing now, and Twitch has that market pretty well covered.”

I know my friend is not a stock analyst. But he’s damn sure a gaming expert and I’d be willing to bet he knows a hell of a lot more about Twitch’s reputation, interface, and role in the gaming world than any of the analysts on CNBC do. In fact, I’d be willing to bet that when they went to sleep last night, those analysts knew exactly as much about Twitch as I did when I woke up this morning.

Numbers and statistics only tell you so much about a company, particularly a relatively new company. If I told you about a social media company that had 36 million online users, you might get excited… until I dropped the name “Myspace” on you. And when it comes to companies that rely heavily on reputation or popularity, getting ahead of the curve when a trend starts to sour might be easier than you think.

This is an extremely anecdotal example, but I’ve enjoy watching it play out exactly how I suspected it would. About five years ago, my wife went on a long-winded rant about Coach. I will now provide a mercifully brief summary of the argument she made in 2009: Coach used to be an exclusive, high-end brand name. But lately she had seen too much cheap Coach merchandise popping up in more and more stores. She had paid a pretty penny for her Coach purse several years prior, and now everyone had a Coach purse! In conclusion, she would not be buying another Coach purse.

It struck me at the time that, while Coach’s choice to “slum it” by offering lower-priced merchandise in more locations, including outlet stores, likely generated an initial surge in revenue for the company, this choice might come at the steep price of a blow to the company’s exclusive brand name, which is why everyone wanted the Coach purse to begin with. I know my wife didn’t research the company, but if she felt that way about the company, I knew she was likely not the only one.

Turns out she wasn’t alone, and Coach’s reputation as a fashionable brand eventually took a hit. It was only a matter of time before the stock did too:

I didn’t make a single dollar off of Coach because I’ve never taken a position in the stock. But I always remember my wife’s rant when I hear or read about the downfall of Coach.

My wife’s PhD research was in nanotechnology, an extremely exciting new frontier in technological advancement. There are several publicly-traded nanotechnology-focused companies. But without talking to my wife, I have no idea which company’s product or research has major potential and which company’s “business model” is little more than a pipe dream. Being an expert about stocks can only tell you so much about the future of a company. But talking to an expert in a company’s particular sector, especially if it’s something specific like nanotechnology, is almost like getting “insider” information, only this method is completely legal!

My point is this: stock analysts are (sometimes) experts on the stock market. They are not necessarily experts on nanotechnology. Or fashion. Or gaming. If you are not talking to friends, family, coworkers, babysitters, church members, and neighbors about the companies and sectors that are their personal areas of expertise, you are wasting a huge, trustworthy source of information coming from people with no hidden agenda. Obviously, do your own research on the company and the stock before buying. But never underestimate the power of a simple conversation with a friend.

And before I wrap up, I’ll give my two cents on Twitch. Good for Amazon. But unless Twitch can boost Amazon’s annual profits by $12 billion, Amazon’s stock is still too expensive.

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